We recently published a list of 10 Best Water Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where A. O. Smith Corporation (NYSE:AOS) stands against other best water stocks to buy according to hedge funds.
The water business in the USA is a diverse sector that includes various activities necessary for the development of urban and rural communities. Public utilities are the backbone of this industry – hundreds of public services offer ordinary, everyday water supply and wastewater treatment services to millions of homes and businesses. Such organizations provide the source, treatment, and distribution of potable water, in addition to wastewater collection and treatment to meet environmental standards. Beyond the realm of public utilities, the water industry includes private companies whose expertise is focused on water infrastructure engineering, consulting, and construction. These companies often collaborate with government agencies to modernize aging water systems and implement sustainable solutions, meaning that a significant portion of the water management market is financed from public budgets. They also provide cutting-edge technologies for water purification, desalination, and leak detection, which play a crucial role in improving the efficiency and reliability of water systems.
Several trends and tailwinds are currently shaping the water business in the USA and the rest of the world. One of the most significant trends is the increasing focus on sustainable water management practices due to growing concerns about water scarcity and climate change. Smart water grids and modern metering infrastructure are some of the inventive interventions being implemented to help make water use more efficient and also cut losses. The emergence of digital technologies such as IoT and AI is disrupting the status quo, providing new ways for water utilities to monitor and manage their operations, allowing for real-time data collection and analysis followed by predictive maintenance – this will not only help make water consumption more sustainable, but may also provide significant opportunities for profitability expansion by cutting some operational costs. Another significant trend is the rising investment in water infrastructure, fueled by government initiatives and public-private partnerships aimed at upgrading aging water systems and expanding access to clean water.
From an investment perspective, the future of the water business in the USA looks bright, with several factors contributing to its potential growth. First, there’s an increasing demand for clean and safe water, which is primarily driven by population growth and urbanization. This issue presents substantial opportunities for water treatment companies and distributors. Moreover, the increasing awareness and focus on the environmental and sustainability aspect of the operations, primarily caused by regulatory requirements, are likely to fuel demand for innovative water management solutions and sustainable practices. Investors are particularly interested in the water solutions sector due to its incredible resiliency during recessionary periods; as many water-related projects are sponsored by public budgets, companies exposed to water operations usually have a low equity beta, meaning that they are likely to outperform the broad market during bearish periods. This feature is particularly attractive during stock market peaks – the US equity market is currently near its all-time highs, all while the actions of the new Trump 2.0 regime are starting to cause cracks in the outlook of businesses and consumers. With many surveys and intelligence agencies reporting a sentiment change towards more pessimistic scenarios, as well as significant cuts in the outlook for capital spending by private entities, water-related businesses may become more favored in the eyes of the “smart money”. In view of this, we will take a look at some of the best water stocks to buy now.
Our Methodology
We used the Insider Monkey proprietary hedge fund holding database and identified the 10 most popular water companies, ranked by the number of hedge funds which own the stock.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A man in overalls soldering a large water heater inside a manufacturing facility.
A. O. Smith Corporation (NYSE:AOS)
Number of Hedge Fund Holders: 37
A. O. Smith Corporation (NYSE:AOS) is a global manufacturer specializing in water heating and water treatment solutions for residential, commercial, and industrial applications. Headquartered in Milwaukee, the company is a leading provider of high-efficiency water heaters, boilers, and purification systems, with a strong presence in North America, China, and India. The innovative technologies of AOS focus on energy efficiency, sustainability, and smart water management, catering to growing demand for reliable and eco-friendly water solutions. Its extensive distribution network and commitment to research and development have solidified its reputation as a trusted name in the water industry.
A. O. Smith Corporation (NYSE:AOS) reported lower sales and earnings in 2024 compared to their record 2023 performance. In North America, sales increased slightly due to higher boiler and water treatment sales along with water heater pricing benefits, though these were offset by lower heater volumes. The company faced challenges in China where weak economic conditions negatively impacted consumer demand, leading to a 4% YoY decrease in the Rest of World segment local currency third-party sales. The company took strategic actions including completing the construction of a tankless manufacturing facility, implementing a strategy to improve North America water treatment business margins, and reorganizing the China business to reduce costs.
Despite a slow 2024, the outlook for 2025 is optimistic, as management projects EPS guidance of $3.60 to $3.90 per share, with the midpoint slightly higher than 2024 adjusted EPS. A. O. Smith Corporation (NYSE:AOS) plans to repurchase approximately $400 million of shares in 2025, higher than previous years, reflecting confidence in strong free cash flow generation. Management expects relatively flat industry growth in core North America water heater and boiler markets, while anticipating continued soft market conditions in China. The restructuring actions in China are expected to be mostly implemented by the second quarter with anticipated annual savings of approximately $15 million.
Overall, AOS ranks 8th on our list of best water stocks to buy according to hedge funds. While we acknowledge the potential of AOS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AOS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.